Workers Compensation Insurance

Workers Compensation

Workers compensation insurance covers the cost of medical care and rehabilitation for workers injured on the job. It also compensates them for lost wages and provides death benefits for their dependents if they are killed in work-related accidents, including terrorist attacks. The workers compensation system is the “exclusive remedy” for on-the-job injuries suffered by employees. As part of the social contract embedded in each state’s law, the employee gives up the right to sue the employer for injuries caused by the employer’s negligence and in return receives workers compensation benefits regardless of who or what caused the accident, as long as it happened in the workplace as a result of and in the course of workplace activities.

Workers compensation systems vary from state to state. State statutes and court decisions control many aspects, including the handling of claims, the evaluation of impairment and settlement of disputes, the amount of benefits injured workers receive and the strategies used to control costs. From 2008 to 2009 maximum income benefits for total disability increased an average 3.67 percent. The average maximum weekly benefit in 2009 was $763.16, according to the U.S. Chamber of Commerce 2009 Analysis of Workers Compensation Laws.

Workers compensation costs are one of the many factors that influence businesses to expand or relocate in a state, generating jobs. When premiums rise sharply, legislators often call for reforms. The last round of widespread reform legislation started in the late 1980s. In general, the reforms enabled employers and insurers to better control medical care costs through coordination and oversight of the treatment plan and return-to-work process and to improve workplace safety. Some states are now approaching a crisis once again as new problems arise.

RECENT DEVELOPMENTS

National: According to A.M. Best, workers compensation premiums for 2009 dropped 14.5 percent to $12.3 billion, the lowest level in 10 years, while the combined ratio, the percentage of each premium dollar spent on claims and expenses, rose 8.8 percentage points to 120 percent. The deterioration in profitability was driven by a continuous decrease in premiums as poor economic conditions reduced the number of people in work force and intense competition for business reduced prices for coverage.

A study by the National Academy of Social Insurance (NASI) released in September 2010 shows that workers compensation payments for medical care and cash benefits that help cover lost wages increased 4.4 percent in 2008, the latest available data, to $57.6 billion. For the first time, but reflecting a long-term growth trend in medical spending for the past 30 years, medical benefits totaled more than half of all benefits paid, driven by an 8.8 percent increase in payments for medical care. The increase in wage replacement payments was minimal (0.3 percent). Overall, employers’ costs declined by 6.7 percent to $78.9 billion. Per $100 of payroll, the basis for computing workers compensation, employer costs in 2008 were $1.33, a 0.11 percent decrease from the previous year. Cash benefits to workers per $100 of payroll dropped 0.01 percent to $0.48. This is the lowest level since 1980, according to NASI.

State activities:

Denial of Coverage to Illegal Immigrants: Bills that would deny workers compensation benefits to illegal aliens who are injured in the workplace appear to have stalled. Legislation was introduced in Georgia, Montana, New Hampshire and South Carolina earlier in the year but has not been enacted in any state.

Although federal law prohibits knowingly hiring illegal immigrants, once hired, most states do provide workers compensation benefits regardless of immigration status and courts have generally held that such workers are entitled to benefits. In general, insurers are opposed to denying benefits to illegal aliens. First, it runs counter to public policy. Workers compensation laws serve a humanitarian purpose. In addition, denial could encourage unscrupulous employers to seek out illegal aliens, knowing that they could avoid the cost of workers compensation coverage and thus gain a marketplace advantage over their law-abiding competitors. Second, the workers compensation’s exclusive remedy provision protects employers from lawsuits charging them with negligence in the workplace. Without this protection, when workers are injured, whether or not they are illegal aliens, employers are exposed to civil litigation.

North Carolina: A bill, H.B. 709, is making its way through the legislature. Among other things, it caps payments to a totally disabled worker. The current law, which has no cap so benefits can continue for a lifetime, raises overall costs to the point where the state is at a competitive disadvantage in attracting new business relative to states that have different and less costly systems, the bill’s sponsors say. Another provision extends the maximum time death benefits can be paid to dependents and wage benefits can be paid to partially disabled workers.

Illinois: Shortly before the legislature was to adjourn on May 31, the House passed H.B. 1698 on a second try. The bill aims to curb escalating costs and create a more attractive and competitive business environment by cutting medical fees to doctors and hospitals by 30 percent, for a potential reduction in costs of up to $700 million, lowering the number of weeks workers with carpal tunnel syndrome receive benefits to 28.5 from the current 40, and using AMA guidelines to determine the degree of impairment.

Costs in Illinois are the third highest in the nation, according to a biannual premium ranking from the Oregon Department of Commerce and Business Services. Only Montana and Alaska have higher costs. The centerpiece of the legislation was cutting payments to doctors and hospitals but initially some lawmakers objected to such steep cuts. Critics say the most serious weakness in the state’s workers compensation system is “causation,” meaning the extent to which injuries are work-related, which the measure did not address. Earlier in the year, the Governor suggested a package of reforms, among them strengthening the causation standard so that only injuries that are held to be more than 50 percent employment-related would be compensable.

Kansas: In April 2011 Kansas Gov. Sam Brownback signed into law a bill that makes substantial changes to the workers compensation system, which the Governor characterized as a good compromise between the needs of business and labor. The legislation makes injuries caused by repetitive trauma and occupational disease compensable; strengthens the causation standard so that the work incident is the prevailing factor for an injury to be compensable; clarifies rules governing payments to employers when an employee with pre-existing conditions not related to the current employer’s workplace is injured; and raises benefit caps for workers with various degrees of disability.

Montana: Also in April Montana Gov. Brian Schweitzer signed a much-brokered major workers compensation reform bill (HB 334) which, the NCCI says, could lower costs by about $100 million. Montana’s system is currently the most expensive, according to the Oregon Department of Commerce and Business Services. The measure terminates medical benefits five years after the date of injury or occupational disease diagnosis, but allows cases related to older injuries to be reviewed every two years and be reopened if justified by medical evidence; freezes the medical fee schedule for two years until mid 2013; and requires disability payments for partial disability to be based on wage loss. To improve return to work rates, “stay at work/return to work” services will be provided.

Oklahoma: Oklahoma is one of a handful of states where the courts administer the workers compensation system. Legislation modifying the court system was passed in 2010 and continued in 2011 but critics are aiming to shift the court-based system to an administrative one in the future. In 2011, in a major push to reduce workers compensation costs, legislation developed by a special study group set up by Gov. Mary Fallin was approved by the Senate in a bipartisan vote of 44-0 in March. Gov. Fallin has called the system’s high costs an obstacle to job creation.

The bill, SB 878, passed the legislature in May after months of negotiation. The measure would radically change the state’s workers compensation statute, the first major overhaul in more than three decades. Among other things, it tightens the definition of a compensable injury; requires a new medical fees to be developed that would result in an overall reduction in medical care costs of 5 percent; significantly reduces the maximum period during which an injured worker can receive temporary total disability benefits; and requires the use of nationally recognized treatment guidelines to control the type of treatment injured workers receive, standards that are used in Texas and Kansas. In addition, the measure would facilitate a worker’s early return to the workplace through vocational rehabilitation programs.

Texas: Major reforms were enacted in 2005 that transferred responsibility for workers compensation from a commission to the Texas Insurance Department, improved access to healthcare and advice for injured workers, promoted return-to-work programs, created medical treatment guidelines and raised injured workers’ benefits.

In January 2011 the department published its biennial report on system improvements. Highlights of the report indicate that since 2005, the nonfatal occupational injury/illness rate in the state has decreased 19 percent, from 3.6 to 2.9 injuries per 100 full-time employees (the rate of injury also dropped nationally, see below). The percentage of employers that participate in the program (i.e., became subscribers, see Background section) rose from 62 percent in 2004 to 68 percent in 2010, due mainly to lower premiums, down 40 percent since 2003, and the increased availability of workers compensation healthcare networks. And the percentage of injured employees receiving temporary income benefits who initially returned to work within six months of their injury rose from 74 percent in 2004 to 80 percent in 2009. Of those, 71 percent remained employed for three consecutive quarters compared with 66 percent in 2004.

California: Insurance commissioner Dave Jones opposed the suggested 29.6 rate increase requested by the Workers Compensation Insurance Rating Bureau. The bureau’s recommendations are advisory only. The bureau noted that even with the proposed increase, rates would still be 53 percent lower than those in effect on July 1, 2003, the year reforms designed to stabilize the cost of the system were adopted.

Despite the reduction in cost, many believe that the system is still too litigious. A study by the California Workers Compensation Institute found that between 2000 and 2008 attorneys were involved in nearly 44 percent of all lost time claims (those in which the injury caused time off work) and in more than 86 percent of claims involving permanent disability. The legislative and administrative intent of the 2003/2004 reforms was to eliminate the perceived unpredictability of medical and disability assessments. However, the fine print of the legislation and the implementation and adjudication of the rules and regulations, including inconsistencies in Workers Compensation Appeals Board decisions, have compromised the potential impact of the reforms and led to new types of disputes. These include disagreements as to the conditions that can be defined as eligible for permanent disability benefits and the apportionment of such disability between work-related and non-work-related medical conditions.

A recent RAND Institute for Civil Justice study commissioned by the California Commission on Health and Safety and Workers Compensation and conducted with Navigant Consulting found that the volatility in the state’s workers compensation market after rates were partially deregulated in 1995 was due largely to inaccurate cost projections. To improve the accuracy of cost projections, researchers recommend that future reform legislation be written in more explicit language and that more comprehensive data be made available on workers compensation claims. In addition, to improve the reliability of actuarial opinions, the California Department of Insurance should consider hiring its own actuaries and then charging insurers for their services to reduce the possibility of conflicts of interest in the preparation of reports and that, to catch insurers likely to fail earlier, the Department should create an early warning system that would trigger mandatory financial examinations. The researchers also suggest that the National Association of Insurance Commissioners’ Risk-Based Capital system, which sets targets for capital (policyholders’ surplus) according to the riskiness of an insurer’s business, is not stringent enough.

State Funds, Competitive Funds: Following the successful change over in West Virginia from a state-controlled workers compensation system to a private competitive market, several states, including Arizona, Colorado and Oklahoma, all of which have workers compensation entities with some degree of state oversight that compete with the private market, have been looking into some form of privatization. Some impetus for the sale of these entities is the poor local economy and the resulting budget deficits. (Other states are raiding special workers compensation funds where money has been set aside for specific purposes such as paying the claims of insolvent insurers.)

In Arizona, the legislature has agreed to privatize the State Compensation Fund, requiring the transaction to be completed by 2013. The fund had a market share of 31.5 percent in 2009, according to the state’s department of insurance.

In Oklahoma CompSource, which insures about 35 percent of the market, has a 5 percent advantage over private insurers because it does not pay premium taxes. A legislative task force studying the options voted 5 to 4 in favor of creating a mutual company, but the idea was dropped when opponents said that it would result in higher premiums for small businesses. Most of the businesses in the state are small, with 98 percent having fewer than 100 workers and 75 percent having fewer than 10, according to the State Chamber of Oklahoma.

In Colorado Pinnacol Assurance, a quasi-mutual company with almost 60 percent of the market, is also exempt from premiums taxes. A legislative committee charged with reviewing the feasibility of Pinnacol’s continued operation as a division of state government or of selling it to a third party recommended a number of measures, including changing it to a mutual company that would still serve as a market of last resort. But the proposal failed to gain enough support.

In Washington State, which has a monopolistic state fund, a ballot initiative that would have led to opening the market to private competition was defeated in the November 2010 elections. Voters rejected the initiative, I-1082, by a wide margin. The initiative was spearheaded by the Building Industry Association of Washington and endorsed by the National Federal of Independent Business. It would have created a task force on private competition to draw up legislation and make recommendations.

In Ohio, which also has a monopolistic state fund, there has also been interest in allowing some form of competition from private insurers. In November 2009 the Senate voted to create a task force to evaluate the current system, compare it with competitive systems in other states and review the options. At a hearing held in August 2010, the president of the Insurance Information Institute, Robert Hartwig, suggested that the state’s monopolistic system is out of keeping with economic reality. There is no other type of liability insurance in the United States where the state is the sole provider of coverage although states have had ample opportunity to create such a system. Ohio voters rejected a ballot initiative on privatization in 1981. Ohio has the largest monopolistic state fund in the nation. It would require a constitutional amendment to totally privatize Ohio’s system.

In July 1, 2008 West Virginia opened up its workers compensation business to any insurer that meets state requirements. Before, coverage was only available from the state-run mutual company. In readiness for the change over, 147 insurers filed rates; 23 were new to the state, according to the insurance department. The state was one of five with a so-called monopolist state fund, from which all employers, except those that are self-insured, must purchase their workers compensation coverage. The privatization process was phased in. A private mutual insurance company was created in June 2005. Nevada went through a similar change several years ago, enacting legislation to begin the workers compensation privatization process in 1999. It now has a mutual insurance company.

The move to privatize comes at a time when state funds are growing. According to a new Conning Research & Consulting study, Workers Compensation State Funds: Evolution of a Competitive Force, state-backed workers compensation funds operate in 25 states and account for one-quarter ($11.3 billion in premiums) of the workers compensation market. While they generally have higher losses than private insurers (they are often the market of last resort, insuring high risk businesses that cannot find coverage in the private marketplace) these are offset by higher investment income and operating results comparable to private insurers, the study found. State funds also work closely with other government agencies, such as state occupational and health and safety associations, to reduce injuries.

Financial Results: In May 2011 the NCCI released its annual “State of the Line” workers compensation market analysis, showing that in the 2010 calendar year the workers compensation system produced a large underwriting loss, with a combined ratio of 115, compared with 110 for 2009, although as in 2009 three percentage points were due to a single insurer adding to its reserves. In 2010 the figure was $800 million, the year before $1 billion. Even at 112, this is a considerable deterioration from 2009. State funds fared even worse, reporting a combined ratio of 120 compared with several years of 111-115.

Premiums in 2010 were lower than in 2009, but the drop was less precipitous than in prior years, decreasing just 1.3 percent from 12 months earlier.

An analysis by the Insurance Information Institute shows that although unemployment and the resulting loss of payroll, the basis for workers compensation premiums, contributed to the sharp drop in premium over the past several years, aggressive pricing along with large deductible programs, and the use of captives and self insurance are responsible for a significant portion of this decline, which started as far back as 2006. Another depressing factor is the drop in interest rates. Low rates reduce the amount of investment income available to offset underwriting losses. According to A.M.Best, a 1 percent drop in yield on an insurer’s investment portfolio requires a 5.7 improvement in the workers compensation combined ratio.

The residual market share, as measured by premiums, fell again in 2010 but there are signs that it could be creeping up: premiums for the residual market were slightly higher in the first quarter 2011 than in the same quarter 2010. Residual market premiums totaled $400 million, down from $700 million in 2008, representing a 5 percent market share, about the same as in 2009. Among businesses insured in the residual market, large employers are most likely to be leaving.

Obesity and Workplace Injury Costs: Initial findings from an NCCI study on the cost of claims filed by workers who are obese found that their claim costs were significantly higher than those filed by nonobese workers. The findings are similar to a 2007 study of employees at Duke University. There, workers who were morbidly obese (those with body mass index (BMI) of 40 and above) filed 45 percent more claims, missed eight times the number of workdays and experienced medical costs that were more than five times higher than those of nonobese workers. Likewise, workers who were overweight (those with a BMI of 25.0 to 29.9) filed 9 percent more claims, with costs that were 1.5 times as high as people with so-called normal weights (a BMI of 18.5 to 24.9) and missed up to 3.5 times as many workdays. The NCCI study results, which will help underwriters more accurately assess how obesity is pushing up workers compensation claim costs, was released in December 2010.

Workplace Deaths and Injuries: Bureau of Labor Statistics (BLS) data show that 4,340 workers were killed on the job in 2009, compared with 5,071 workplace fatalities in 2008 and 5,657 in 2007, with the greatest decrease in transportation-related deaths. The death rate for 2009 per 100,000 workers was 3.3 compared with 3.7 in 2008, a significant drop that many experts attribute to the poor economy. Fewer people were working last year in jobs where many of the fatalities typically occur such as construction.

Workplace injury rates are now at their lowest level since the BLS began tracking information in the 1970s, according to the agency. BLS data show rates for private workplace injuries and illnesses dropped 7 percent from 2007 to 2008, the latest available data. In 2008 the rate decreased to 113 per 10,000 full-time workers and the number of cases dropped by 80,730. Some 1.1 million cases requiring days off work or restricted duties were reported in private industry workplaces, down from 1.2 million in 2007.

A study by the NCCI on the number of claims (frequency), published in the summer of 2009, found that claims frequency had dropped 4.0 percent in 2008, compared with 2.6 percent in 2007. The number of claims overall has been falling since the 1990s but the size of the decrease has been fluctuating from year to year. In 2005 and 2003 the drop was close to 7 percent but in 1999 it was 2.3 percent and there were even slight increases in 1994 and 1997. Almost every employment category the NCCI examined has experienced declines.

The cost of claims (severity) has continued to grow, however, particularly for medical care, with an estimated jump of 6.0 percent for workers compensation medical care costs, compared with an estimated 3.7 percent for the medical care consumer price index. As part of the review, the NCCI looked at changes in permanent total claims, the costliest 1 percent of lost-time claims, which have risen significantly over the past few years, driven primarily by injuries to people under 50.

A study by the Texas Department of Insurance Research and Evaluation of workers injured between 2004 and 2007 showed that workers are returning to work faster. For 2007 some 76 percent of workers returned to work within six months of the injury, compared with 72 percent in 2003. After 18 months, 91 percent had returned in 2007, compared with 85 percent in 2003.